Fundamental Analysis: Shekel Retreats on Politics and Gas Shutdown

Israel’s shekel has moved back today from recent highs as the Tamar gas field remains closed. Some volatility has also come from Prime Minister Netanyahu’s latest push for judicial immunity. However, last week’s data indicating the health of Israel’s economy continues to provide some support.

The shekel retreated against the dollar in early trading today, with $1 currently worth around ₪3.57. GBPILS has also moved upward somewhat in today’s session to about ₪4.65 at the time of writing. In both cases, though, prices remain close to month lows.

Tension in Gaza and immunity bill

Rocket attacks from Gaza into Israel at the start of the month led Israel’s energy ministry to close the country’s only operational gas field last week. The Tamar field is a major source of gas exports as well as domestic energy. This latest wave of attacks has also caused damage worth about ₪50 million since the start of May. The shekel is widely considered to be a ‘conflict currency’, the movements of which often depend on the latest news of tension and violence between Israel and its neighbors.

The shekel also faced headwinds from this morning’s news that Israel’s Prime Minister Benjamin Netanyahu intends to weaken the judiciary’s powers. The PM plans to support a bill in the Knesset that would give government the power to ignore the High Court of Justice’s decisions for administrative affairs. If passed, this bill could protect Mr Netanyahu from upcoming investigations for corruption.

Data suggests a strengthening economy

Despite the effects of terrorism and political issues, recent economic data from Israel has been very positive. Manufacturing PMI for March last Wednesday continued its recovery. The figure of 52.2 indicated a return to expansion of activity against February’s 49.6. This release supported the shekel significantly because of manufacturing’s high importance in Israel’s economy.

Last Tuesday also featured big news of a nine-year high in business confidence. 26.02 is the highest figure since early 2010. Furthermore, foreign exchange reserves made a new all-time high in April. Nearly $119 billion is the highest figure since current records began in 1995.

Another big week of data ahead of rate decision

This week is also very important in Israeli data. Annual and monthly change in inflation is on Wednesday at 15.30 GMT, then GDP growth is the next day at 10.00. April’s manufacturing PMI on Thursday at noon is set to be a key release that could establish further direction for ILS.

In addition to data, though, traders will be looking at the latest news from Gaza and the Israeli government. Ongoing violence as well as heightened controversy over Mr Netanyahu’s planned bill could hurt sentiment on the shekel.

Looking slightly further ahead, the Bank of Israel will set its benchmark rate on Monday, May 20, at 13.00 GMT. A hike from the current 0.25% is unlikely, but traders will be studying comments in the accompanying statement that could hint at plans for the rest of the year.

Shekel set for more small losses

Fundamentals as of now are somewhat negative for ILS, suggesting that a further small weakening is favorable for the next couple of days. However, this week’s data certainly has the potential to alter this picture. Traders should also be aware of technical conditions, monitoring momentum and saturation.

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